July 9, 2018

The Markets

What a rollercoaster of a quarter!

When it comes to the American Association of Individual Investors (AAII) Sentiment Survey, respondents tend to be more bullish than bearish about U.S. stock markets. The survey’s historical averages are:

·         38.5 percent bullish

·         31.0 percent neutral

·         30.5 percent bearish

As the second quarter of 2018 began, investors were feeling less optimistic than usual. (About 36.6 percent were bearish and 31.9 percent bullish.) Their outlook was informed by a variety of factors, according to an early April article in The New York Times, which said:

“First there was the risk that the economy might be growing too fast, which could prompt central banks to hike interest rates sooner than expected. Then there was the risk of a trade war ignited by the White House imposing tariffs on certain products, an action that quickly prompted countries like China to erect trade barriers of their own. Next came the threat of a government crackdown on technology companies, after revelations of their misuse of customer data.”

As the quarter progressed, investor optimism increased on signs of economic strength. In early June, CNBC reported the economy appeared to be “operating close to full employment, with an unemployment rate at 3.8 percent, inflation still hovering at or below 2 percent, and business and consumer confidence strong.”

Robust corporate earnings helped spur optimism, too. FactSet Insight wrote, “The S&P 500 reported earnings growth of 25 percent for the first quarter – the highest growth since Q3 2010.” In mid-June, the AAII survey showed 44.8 percent of respondents were feeling bullish, 21.7 percent were bearish, and 33.5 percent were neutral.

As talk of tariffs and trade wars resumed, investor optimism plummeted. By the end of June, just 27.9 percent of respondents were bullish and more than 39 percent reported they were feeling bearish. AAII explained:

“Many – but not all – individual investors anticipate continued volatility and/or think that the current political backdrop could have a further impact on the stock market. Trade policy is influencing some individual investors’ sentiment as well. While many approve of the Federal Reserve’s plan to continue gradually raising interest rates, some AAII members are concerned about the impact that rising rates will have. Also influencing sentiment are valuations, tax cuts, earnings growth, and economic growth.”

Despite a downturn in bullishness, major U.S. stock indices moved higher last week.

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

there’s a carbon dioxide (CO₂) shortage. really, it’s true. Many people agree the world has too much CO₂. It’s the reason representatives from countries around the world signed the Paris Climate Agreement. They committed to “adopt green energy sources, cut down on climate change emissions, and limit the rise of global temperatures,” reported National Public Radio.

The effort has been less successful than many had hoped, according to the International Energy Association (IEA). After several years without increases, energy-related emission rose by 1.4 percent in 2017. That’s the rough equivalent of putting 170 million more cars on the road, reported Scientific American.

Emissions rose primarily in Asia, although the European Union (EU) saw increases, too. The biggest decline was in the United States. There’s a certain irony there, since President Trump announced he would withdraw from the agreement in June 2017, reported The Washington Post.

Despite realizing a 1.5 percent increase in ­­­­­ emissions, the EU is experiencing a shortage of food-grade CO₂. The Economist reported:

“Food-grade CO₂ is a vital ingredient: it puts the fizz in carbonated drinks and beer, knocks out animals before slaughter and, as one of the gases inside packaging, delays meat and salad from going off. A shortage of the stuff has therefore created havoc in food makers’ supply chains.”

The EU’s food-grade CO₂ is a harvested by-product of processes for making ammonia and other chemicals, reported The Economist. Three of Britain’s five ammonia plants have been closed because farmers are using less fertilizer, and CO₂ does not deliver enough revenue to keep the plants running.

Let’s hope the shortage of CO₂ doesn’t affect the supply of beverages available to World Cup fans. 

Weekly Focus – Think About It

“My garden is an honest place. Every tree and every vine are incapable of concealment, and tell after two or three months exactly what sort of treatment they have had. The sower may mistake and sow his peas crookedly; the peas make no mistake, but come up and show his line.”

--Ralph Waldo Emerson

Best regards,

Lee Barczak

There’s a bear in China – and it’s not a panda.

The Shanghai Stock Exchange (SSE) Composite Index, which reflects the performance of all shares that trade on the Shanghai Stock Exchange, dropped into bear market territory last week, reported CNBC. The Index has fallen more than 20 percent from its previous high. It appears some investors saw an opportunity and bought the dip since the SSE Index bounced higher last Friday, gaining more than 2 percent.

Slower economic growth and rising trade tensions were responsible for much of the red ink in China, reported Barron’s, but the Chinese government may be playing a role, too:

“What’s got global market watchers worried is that China’s stocks are sliding in tandem with its currency, the renminbi or yuan…That suggests China is using the exchange rate as a weapon. ‘The most effective way for China to retaliate [against] rising U.S. tariffs is to weaken the yuan,’ according to the July Bank Credit Analyst. That could roil financial markets, however. The dual declines in China’s equity market and currency are raising concerns of a repeat of 2015. Treasury strategists at NatWest Markets recall that the drop in the yuan that summer sparked severe equity market losses, including a 10.5 percent correction in the S&P 500.”

That may explain, in part, why U.S. Treasury bills were so popular last week, although it probably didn’t hurt the yield on short-term Treasuries was roughly equivalent to the dividends paid by the Standard & Poor’s 500 Index.

The coming weeks may deliver more excitement than Fourth of July fireworks.

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

from asia with love. Sometimes the hottest trends in other regions of the world are similar to those in the United States and sometimes they’re very different. Here are three recent chapters in the book of Asian cultural trends. 

Improving your future wife’s ROI. Single men in the Land of the Rising Sun are trying to increase their value on the marriage market by taking parenting classes. The lessons include developing empathy for future spouses by wearing pregnancy suits. The Atlantic reported, “The man in the traditional kimono is having difficulty…The weight of the belly strains his back. Simply walking around the room – a party room in a Tokyo condo building – is more like lumbering. Lying down and getting up again is a struggle. The rest of the men in the Ikumen class laugh as he tries to adjust to the new reality.”

Shopaholics rejoice. ‘Shopstreaming’ is a little bit e-commerce and a little bit live streaming, reports Trendwatching Quarterly. “Asians are social shoppers – they rely on social media recommendations for their purchase decisions. For many, the ability to talk to sellers and buyers can build trust and allay fears about counterfeit goods. In Southeast Asia, 30 percent of e-commerce sales are started on social media and completed in messaging apps…”

It’s not just puppy love. Newly minted middle classes in developing nations are turning to pets for comfort and companionship. In emerging markets in the Asia Pacific region, Spire Research reports, “Changes in consumer lifestyles and rising disposable income are driving acceptance for pets and boosting the entire pet-related industry along the way.”

Trends are entertaining. As in any industry, they also can help business owners unearth expansion opportunities and help asset managers discover companies with potential.

Weekly Focus – Think About It

“I learned to make my mind large, as the universe is large, so that there is room for contradictions.”

--Maxine Hong Kingston, Chinese American author

Best regards,